Question : Assertion-Reason Questions: Chapter - Sources of Business Finance
Questions : Different Sources of Finance
Assertion: Retained earnings are an internal source of finance.
Reason: Companies distribute all profits among shareholders and do not retain any earnings.
Option 1: Both assertion and reason are true, and the reason is the correct explanation of the assertion.
Option 2: Both assertion and reason are true, but the reason is not the correct explanation of the assertion.
Option 3: Assertion is true, but the reason is false.
Option 4: Both assertion and reason are false.
Correct Answer: Assertion is true, but the reason is false.
Solution : The correct answer is (c) Assertion is true, but the reason is false.
The assertion is true. Retained earnings are indeed an internal source of finance. Retained earnings are the portion of a company's net profit that is not distributed to shareholders as dividends but is instead retained and reinvested in the company for various purposes such as expansion, debt reduction, or future projects.
The reason is false. Companies do not distribute all profits among shareholders; they retain a portion of the profits as retained earnings. This is precisely what retained earnings are - the portion of profits that is retained within the company rather than being immediately distributed to shareholders as dividends.
